TREASURIES-Yields fall as weak housing sales raise mortgage fears
* Yields fall on unexpectedly weak housing data
* Intermediate-dated debt weaker on 2015 rate hike expectations
* Treasury to sell $98 billion of 2, 5, 7 year notes
NEW YORK, Aug 23 (Reuters) - U.S. Treasuries yields fell from two-year highs on Friday after weak housing data raised concerns that rising mortgage rates may weigh on the economic recovery, boosting demand for U.S. government debt and leading investors betting on further yield increases to cover their positions. Sales of new single-family homes fell sharply in July to their lowest level in nine months, dropping 13.4 percent to an annual rate of 394,000 units, the Commerce Department said.
"This more than erased the increase in June. It remains to be seen how demand will be sustained at these higher mortgage rates. Clearly, it has retreated from the higher levels we saw earlier this summer," said Lindsey Piegza, chief economist with Sterne Agee & Leach in Chicago. U.S. government debt yields have climbed to their highest levels since July 2011 as a string of encouraging economic indicators raised hopes that U.S. growth is gaining momentum, making it more likely that the Federal Reserve will begin reducing its bond purchases when it meets in September. Benchmark 10-year Treasuries were last up 17/32 in price to yield 2.82 percent, down from two-year highs of 2.94 percent on Thursday. The yields have surged from 1.60 percent at the beginning of May. Rates may come under pressure again next week as the Treasury sells $98 billion in new two-year, five-year and seven-year debt. Many investors have sold bonds and moved to the sidelines on expectations of increased volatility heading into the Fed's meeting on September 17-18. Primary dealers surveyed before the Federal Reserve's July policy meeting said they expected the U.S. central bank to trim its asset purchases by $15 billion starting in September.
Shorter and intermediate-dated notes have underperformed since the Fed released minutes of its July meeting on Wednesday. Some traders had expected that the minutes may have shown discussion over potentially lowering the Fed's unemployment target from 6.5 percent. "There was some expectation that there would be more discussion in the minutes about the possibility of the Fed lowering the threshold, but what the minutes seem to convey is that that would happen only if the Fed decided that more accommodation was necessary," said Amrut Nashikkar, an analyst at Barclays in New York. With unemployment seen likely to drop to the Fed's target in 2014, investors are now adapting to the possibility the central bank will begin hiking rates in 2015. "The market has come to a point where it is increasingly going to start to price in a more aggressive hiking cycle," said Nashikkar. Five-year note yields rose as high as 1.70 percent on Thursday, up from 1.55 percent before the minutes, before falling back to 1.63 percent on Friday. The yield gap between five-year notes and 30-year bonds continued to compress on Friday, shrinking to 218 basis points, the smallest since July 10 and down from 230 basis points before the Fed minutes were released on Wednesday. The August jobs data, due on Sept. 6, is the most influential economic indicator due before the Fed's September 1meeting. The Fed bought $3.215 billion of Treasuries maturing between February 2022 and August 2023 on Friday as part of its ongoing purchase program.